Take the depreciating rupee in your stride

Khyati Dharamsi

Even as the Reserve Bank of India has taken short term measures to curb the mayhem caused by the depreciating rupee, experts indicate that the volatility in the currency is likely to continue. As a business house, you can give up on your wait-and-watch approach and do more to protect your books. Corporates have been crying that RBI must intervene and bring the rupee down to Rs 55. This attitude draws flak from Partha Bhattacharyya, deputy CEO at Mecklai Financial, who says, "It is wrong to expect a Central Bank to intervene. One must have strong-articulated management policy that whenever the exposure to foreign currency crosses a particular limit then the corporate should discipline operations and take cover." Companies are citing past bitter experiences in not using hedging methodologies to salvage the losses. As Anil Bharadwaj, Secretary, Federation of Indian Micro and Small & Medium Enterprises (FISME) reveals, "Exporters used to do hedge their positions in but gave up after they burnt their fingers in 2008. People are shying away from hedging because of volatility." But this may not be the right strategy to adopt as volatility is likely to continue in the rupee vs dollar space. "Volatility hurts any corporate. If the appreciation or depreciation in the currency is in a gradual manner one can adapt accordingly. But sudden appreciation too hurts, just like rapid depreciation," says Bhattacharya. SME Mentor lists five actions you can take to curtail the impact of rupee depreciation on your business: Hedging of risk The risk that your business is likely to run into in adverse currency scenarios can be mitigated by means of hedging. But unfortunately, Indian businesses, which have foreign currency exposure have failed to use hedging and hence stem the damage done by the rupee fall. Mukesh Agarwal, President, CRISIL Research, says, "In total, corporate India had forex debt outstanding of over $200 billion as of March 2013, of which close to 45 per cent is short-term debt. Moreover, only half their forex exposure is hedged." Selective or systematic hedging is essential for businesses where foreign exchange rate plays a major role. "Considering the volatility they can look at a plain vanilla call option or a call spread to cover forwards," says Abhsihek Goenka, founder and CEO, India Forex. You can use Forward Contracts to hedge, wherein you can convert a set amount from one currency to another at a rate and date that are pre-decided. "In the Indian Currency futures markets, the liquidity is good for contracts between 1 and 3 months, but not beyond that," says Bhattacharyya. Another protection is using Call and Put options. Under the Call option you can – but needn't necessarily buy a currency – at a pre-selected rate and a date that is determined earlier. Under the Put option you can sell a particular currency at a certain price and date, but needn't sell it if the situation doesn't turn out the way you had anticipated. "One is not recommended to take the structural leverage, wherein banks had issued structured products in 2008, which were not in the interest of companies. But companies can use Option-based products. They can keep their exposure open and put in a limit after which they take up cover. Say for instance if a businessman thinks the rupee will depreciate to 59 agaginst a dollar, but if he finds that his views have gone wrong then he should do appropriate hedging," says Bhattacharya. Can you take a foreign currency loan / raise money abroad Presently dollar loans are being taken up by importers to pay up the dues. These would come in handy and cheaper until the currency situation stabilizes. Goenka of India Forex shares, "External Commercial Borrowing route is being used by companies, but they are taking Dollar loans at 2% and looking at delaying payments through buyer's credit." But don't delay your decision further. "If you would like to take dollar loans then you would have to take it before the rupee starts appreciating. By drawing a dollar loan now you would be adopting a good hedging policy as there would still be an arbitrage of 3-4%," says Bhattacharyya. Pass on the fluctuation to customers If the demand for your product is inelastic then you can consider passing on the burden of losses due to rupee depreciation onto customers. If you haven't revised your product prices in a while then this may be an opportunity to convince clients about the need for a price hike. Diversify the currency risk If you have been importing from a single nation or receive income in one foreign currency alone, then it's time to explore multiple countries on your business map. This helps as all currencies don't move in tandem. The level you should be eyeing But before you hedge your positions or sit on the deal table with clients, you should be able to take a call on where the currency is headed. "The rupee deserves to be in a stronger situation given the economic scenario, the GDP is better. Our debt has reduced leading to a better fiscal deficit standpoint. The US is getting to be in a stronger health and so our exports to US are better placed," says Harihar Krishnamoorthy, treasurer at FirstRand Bank. "The worst is behind us now. I foresee the rupee going to a level of 58 (against the dollar) in a couple of weeks as the exporters are going sell their dollars," he adds. Abhsihek Goenka, founder and CEO, India Forex, says, "We expect the rupee to come down by a couple of bucks in the short to medium term. But overall the dollar is still looking strong. Companies should be looking to cover up loans keeping in mind the Rs 57-58 level." But Nomura Research's special report titled "India: Turbulent times ahead", sees near-term upside risks to USD/INR continue on Fed tapering concerns, high levels of foreign equity positioning, concerns over external debt obligations and China slowdown risks. As we approach year-end, the global growth recovery should lead USD/INR gradually lower. But remember that volatility will be a rule of the game unless RBI follows up the recent measures with further actions. "The RBI has acted decisively, and this will likely prompt a rebound in the INR in the short term. However, a sustained tightening of domestic liquidity conditions is a rather indirect way of calming FX markets. It is important that the technical steps to calm the FX market in the short term are reinforced by structural medium-term measures to improve India's external trading performance. Only this will allow the authorities to reduce volatility across financial markets as a whole," states Standard Chartered in its Economic Alert July 16, 2013. You can send your feedback on smementor@moneycontrol.com or simply post comments below